Loan Growth May Plunge Off Fiscal Cliff

Industry economists agree that if the U.S. plunges off the fiscal cliff Dec. 31, credit unions probably won’t see any ill effects right away. However, even if a so-called grand bargain is reached between Democrats and Republicans, credit unions could see the loan growth momentum gained this year grind to a standstill.

While the men had some differences of opinion, they agreed on three key points. The country will likely avoid the doomsday scenarios threatened by politicians and investment bankers. The White House and lawmakers are likely to negotiate a temporary solution rather than make major changes. And, regardless of the fiscal solution, the economy is still fragile and will likely experience a downturn.

At press time, the White House and Republican leaders were still miles away from an agreement on how to solve the nation’s budget woes. However, the economists said three basic solutions are possible. Both Republican and Democrats agree to increase taxes, cut spending or a combination of both worth $3 trillion. Both sides agree to increase revenue and decrease spending but delay implementation until after the economy can absorb it. Or both sides reach a temporary solution that kicks the can down the road.

Schenk said if a grand bargain combination of tax increases and spending cuts is reached, the result would “choke off the housing recovery and push us back into recession.” That’s not good news, but Schenk added that doing nothing would only intensify a current lack of clarity about the future, which would hamper both business confidence and consumer confidence.

“If that happens, people will reduce spending on big ticket items, which means less lending for credit unions.”

Worth agreed, recalling that when the federal government created an impasse in 2011 as it debated a solution to the debt ceiling, consumer confidence plummeted from a rating of 70 in June to just 55 in August.

Although Worth said he’s observed consumer interest in the fiscal cliff doesn’t seem as great as it was during the debt impasse, it would still impact consumers’ view of the future and result in less consumer spending and a weaker economy.

“We could get the worst of both worlds,” Worth said. “We could go over the cliff, and then get a deal next year that kicks the can down the road. We could take a hit on the economy through weaker consumer sentiment and still have any deficit benefit to show for it.”

Johnston agreed that consumer confidence is a bigger risk to the economy than the effect of tax increases or spending cuts. Businesses already lack confidence, he said, so fiscal cliff issues are a bad way to end the year and begin the next.

Carrier noted that because of the economic slowdown in China and Europe’s ongoing problems, the United States is actually driving the U.S. economy. Should the already fragile economy here take another hit, the entire world would feel it, he said.

Turner said the way the fiscal cliff solution impacts job growth will have a bigger impact than a decrease in consumer confidence or higher taxes. Consumers aren’t spending less money because they’re anticipating a smaller or no tax refund, but rather, job insecurity.

“My mantra has always been, I don’t care what people are feeling, it’s what they’re doing that’s important,” he said. “Even though they are feeling better, they’re still not spending.”

The economists agreed that the likely outcome of the fiscal cliff will be a temporary slowing of loan growth for credit unions, although they also said the long-term outlook for credit union lending is better, and the economy could even rebound in a big way in a couple of years.

However, opinions were mixed on how the fiscal cliff could impact liquidity.

Worth said liquidity could go either way. Consumers could take a flight of safety out of equities markets and into federally insure money market accounts. However, if the economy sours and taxes increase, they would have less money to deposit, so it could be a wash. Turner agreed that liquidity is unlikely to be affected by fiscal cliff issues because even if taxpayers have fewer refunds and year-end bonuses to deposit, loan outflow is still weak, so seasonal liquidity trends and loan to share ratios wouldn’t be greatly impacted.

Schenk, however, said a double dip recession could mean more liquidity, as nervous consumers increase savings and borrow less. CUNA is forecasting that the worst effects of the fiscal cliff will be avoided, and the economy will continue to grow at a sluggish pace, with a 2.5% annual growth in 2013 and no significant drop in the unemployment rate. The trade association is also predicting that loan balances will gain 5% in 2013, provided a fiscal cliff solution gives consumers and businesses clarity about the future.

Johnston agreed, saying “all bets off for next six months. Nobody can really predict anything until we get past that.”

NAFCU’s Thaler and Carrier were far more concerned about the potential for the credit union tax exemption to get caught up in fiscal cliff negotiations, not directly, but boxed in if politicians agree to cut a set number of tax expenditures in 2013 and set up pick-and-choose scenario next year.

“We don’t want to get stuck inside a tax reform box and have to fight our way out,” Thaler said.